Broadband to drive Saudi telecom sector

Riyadh, September 27, 2012

Saudi Arabia’s telecom sector has strong growth potential with profit growth largely driven by value-added services such as broadband, costs efficiencies, and international operations, said a report.

“We believe that the corporate segment in general and the ICT segment in particular (e.g. data security, cloud computing) is a source of continued growth for the sector with it a key target for Mobily,” said Farouk Miah, head of Equity Research at NCB Capital, Saudi Arabia’s largest asset manager, which published the report.

The new report remained Overweight on Saudi Telecom Company (STC), with a PT of SR51.8 ($13.81) (upside of 30 per cent), and Mobily with a PT of SR81.9 (upside of 20 per cent) and Neutral on Zain Saudi, with a PT of SR11.3 (downside of 5 per cent).

“Focus on the broadband market for all three players remains key, with expansion in network capabilities being sought as a point of differentiation. Valuations remain attractive with the sector trading at 8.0x 2013E P/E,” added Miah.

“Although the upside on STC is greater, Mobily remains our preferred stock, given its strong fundamentals, excellent execution record and good dividend visibility.”

STC has benefited from improved local operations and higher than expected Other Income, whilst Mobily has benefitted from margin expansion (in line with expectations), led by improved operational efficiencies, he added.

For Zain, NCB Capital reduced its PT by 30 per cent, due to subdued revenue growth, leading to margin growth being held back. This is despite factoring in the balance sheet restructuring, completed in July 2012.

According to the report, the sector’s main concern is price-led competition, with voice ARPUs under significant pressure. NCB Capital believe this price-led competition is now also moving into the data segment with operators increasingly launching new offers and different packages to gain subscribers.

The commencement of operations from Mobile Virtual Network Operators (MVNO) would be another source of pressure for existing operators.

Top-line growth led by broadband expected

NCB Capital expects total revenues for the three stocks under coverage to increase by 8 per cent year-on-year to SR46 billion in the second half of 2012 (2H12), driven by a higher broadband subscriber base and growth in Saudi Arabia’s corporate segment.

Seasonal factors (Ramadan and Hajj) take place in 2H12 and should aid sequential growth in the sector. Intense competition in the international call business notwithstanding, margins should be supported by the high-margin Data segment and OpEx efficiencies.

Margin improvement key for players

Stabilising margins remains a key focus for all operators in the sector. STC’s focus in 2012 is on stabilising margins, which for several years has been contracting due to higher competition, expenditure and investment. Mobily, on the other hand, continues to focus on increasing its operational leverage and spread costs over a wider user base to support margins.

Zain’s margin focus is on increasing its EBITDA margin given the high depreciation and amortization which is holding back its move towards net profitability.

Growth in broadband

Broadband remains the key source of growth for the telecom operators in the short to medium term. CITC’s latest update on the Data segment indicates that broadband penetration rate increased to 41.4 per cent of the population in 1Q12 (11.95mn users) from 39.6 per cent (11.34 million users) in 2011.

NCB Capital expects this segment to keep expanding in the coming years and support top-line growth in the sector, as the introduction of mid- and low-end smartphones and technology upgrades enable the use of richer media content, as well enabling lower income consumers access to data products. – TradeArabia News Service